IMF study has raised question marks on the ability of the Reserve Bank of India (RBI) to reach the target of inflation through monetary measures opted by the Bank.
The size of the formal financial sector is quite small in India and might undermine the effectiveness of interest rate change on AD (aggregate demand).
IMF (international monetary fund)
The International Monetary Fund (IMF) working paper estimates relevance as the RBI has recently implemented an inflation-targeting system that requires it to hit publicly announced targets for retail inflation, based on Consumer Price Index (CPI).
“In the absence of effective and reliable links between the policy instruments controlled by the RBI and aggregate demand in the Indian economy the public may lack confidence that the RBI is able to deliver on its announced inflation target, making the target more difficult (and costly) to achieve,” said the IMF working paper — ‘Monetary Transmission in Developing Countries: Evidence from India’